Who will invest when the wind of Latin American discontent blows?

With Luiz Inacio Lula da Silva as Brazil's new president, Latin America is knocking on the door of leftwing politics. Lula's election is part of a broader trend in the region, where Hugo Chavez has seized power in Venezuela and leftist colonel Lucio Gutierrez looks likely to gain control of Ecuador. This swing has been mirrored in the Argentinean polls, and heralds a wind of discontent in Latin America after a decade of market-orientated reforms.

The strength of this trend will depend on how Lula manages the region's biggest economy. He faces the dilemma of tending to popular discontent while restoring the confidence of investors at the same time.

The currency, the real, has been under speculative attack since the polls showed Lula as favourite. The governor of Brazil's central bank, Arminio Fraga, increased interest rates to restore confidence. Yet even though Fraga, a former executive at George Soros's firm, is respected by the markets and the IMF, Lula has removed him without announcing a replacement, thus causing financial instability and uncertainty.

There is nothing Lula could do to guarantee market confidence. No matter how much he softens his speech or dresses in suits, the analysts will always see him as the leader of the biggest leftwing party in Latin America.

The experience of Argentina's former president, Fernando de la Rua, offers an example of this bias. Although De la Rua made efforts to show that his government had aligned with the IMF, he was never fully backed by investors. The presence in his cabinet of leftwing radicals who opposed market policies diminished his image.

When a government hesitates about implementing market reforms or faces impediments to achieving them, confidence fades. Like original sin, you only get one chance and then you are damned forever.

Like De la Rua, Lula will have to offer some jobs to the most radical sectors of his coalition. He also needs to tend to the demands of his people in a context of social and political turmoil. Latin America has the highest income inequality in the world, despite its excellent overall growth performance in the 1990s. The economic commission for Latin America and the Caribbean, ECLAC, claims that the disparity between the per capita output of the region and the rest of the world increased by 3.5% in the 1990s. In Brazil, for example, the per capita income of the top fifth of households is more than 30 times higher than that of bottom fifth.

The World Bank reckons that even if the annual rate of output growth in Latin America reached 4% for the next decade, it would only allow about 50% of the region's population to be lifted out of extreme poverty by 2015. This means Latin America might see some relief after 13 years of following 1990s recipes. Can 150 million people living on less than $2 a day wait that long?

Latinobarometro, a pollster in Santiago, says over 50% of people in Latin America have expressed discontent with market reforms. People have already voted for change in Venezuela, Brazil, Ecuador and even Argentina, where De la Rua resigned last December.

Lula's attacks on the policies of the government proved more popular than in the past. He promised to create 10 million jobs over his four-year term and to cut interest rates - at 21%, and among the highest in the world. In contrast to his predecessor, Fernando Henrique Cardoso -a sociology professor who speaks five languages - Lula left school after the fifth grade. During this year's campaign he accused the nation's elite of being selfish and incompetent, arguing that it was time for ordinary Brazilians to have their voices heard.

Having said that, it is difficult to ignore the new political scenario. President Hugo Chavez of Venezuela told a conference at Oxford University that Latin America was doing a u-turn on economic policy, calling those who still advocate market reforms "deaf and blind". As John F Kennedy said, the real menace in Latin America is not communism, "it is poverty and income inequality". Washington believes now that Latin America is knocking at the devil's, rather than heaven's, door.